Abstract
The objective of this article is to evaluate the volatility of semiconductor manufacturing companies in Taiwan and Japan. This article is an empirical study to evaluate the volatility of the top 10 large semiconductor companies in Taiwan and Japan using their financial statements and stock prices. By comparing Taiwanese and Japanese companies' volatility, the author can show the significance of evaluating the volatility by auditors. This can contribute to improving the audit practice of risk-based procedures. The author made the following conclusions: (1) Detection risk, inherent risk, control risk, risk of material misstatement, and business risk are related theoretically as follows: DR = AR / (IR x CR) = AR / RMM = AR / BR. (2) The volatility is equivalent to IR × CR, RMM, or BR. It resides in the client company. Auditors can't control it but just evaluate it. (3) Two empirical studies of the semiconductor companies of Taiwan and Japan clearly demonstrate the different values of volatility.
TopFocus Of The Article
Analysis of Risk-based Audit Procedure
Modern auditing practice is done by a risk-based procedure. The audit practice guideline shows its theoretical framework. First, we analyze the framework by using stochastic probability numbers. Applying Bayes Theorem, we show how to revise the detection risk and we also show that the evaluation of volatility is a starting line of the risk-based auditing procedure.
Case Study of Taiwanese Semiconductor Companies
Semiconductor companies have led the Taiwanese economy for the past 10 years. The Taiwanese government established a science park in Hsinchu in the 1980s. People who studied IT technologies in the US returned to Taiwan and they started IT businesses there. A few universities and the public research organizations have had alliances with them. One of the success factors of Taiwanese semiconductor companies is said to be that some of them focused on the pre-process of semiconductor manufacturing called a foundry business model.
Our case here deals with top 10 Taiwanese semiconductor companies. We use their financial statements disclosed at the Taipei Stock Market’s MOPS. As the contents of financial statements are level data, we process them into income momentums (rate of change of sales, ordinal profit, net profit, and total assets) for the most recent 10 years. We also use the rate of change of stock prices in the same period. Volatility as a business risk is evaluated by fluctuations recognized by the negative income momentums.
Key Terms in this Chapter
Control Risk: Listed companies are required to install the internal control. Control risk is defined as the probability even when the internal control is installed, it fails to detect the material misstatement of the financial statement.
Volatility: Volatility is defined as the fluctuations of the magnitude between the former condition and the present condition. For example, a company’s former profit is 100 and its present profit is 110, then the volatility of the profit of this company is (110-100) / 100 = 0.1. External auditor needs to evaluate the volatility of a client company.
Detection Risk: Detection risk can be controlled by an auditor by how much audit resources used for a specific audit point. Given the audit risk and the inherent risk, the detection risk is inverse proportional to the control risk; in case the control risk is small, the detection risk can be set high. This means that the audit resource can be saved, and vice versa.
Inherent Risk: Inherent risk is defined as the risk of an object without an audit. A client company are engaged in a business, and it invests its resources for the business. No one can forecast whether the investment is successful or not. The result is variant in some extent. The variance is thought to be inherent risk.
Audit Risk: Audit risk is defined as Inherent Risk x Control Risk x Audit Risk and it is the probability that an auditor fails to detect the material misstatement of the financial statement.